Methods of responding to risks
The final step in the risk management process is to respond effectively to the risks. When adopting a CFO mind-set, you must select and implement measures to modify your organization’s exposure to these threats. There are five common strategies used to respond to these threats:
- risk avoidance — Risk avoidance involves opting out of the activity or situation that carries the risk.
- impact mitigation — Some risks may be difficult or impossible to avoid. Or the potential benefits of the activity may be so attractive that risk is not a sufficient deterrent. In these cases, you need to develop a system to minimize the risk. You can either work to reduce the severity of the loss or the likelihood of the loss threatened by the risk.
- risk sharing — Risk sharing is a method in which the cost of the consequences of a risk is distributed among several participants.
- insurance — Insurance is used by many companies to offset the severity of the loss threatened by the risk. Typical insurance programs can cover the cost of workplace injuries and litigation, damage to business properties, or crime-related losses.
- risk retention — When risks are small and difficult to avoid, an organization may decide to accept the loss from a risk if it occurs. This is often a viable solution for companies if the cost of mitigating the risk is greater than the potential losses incurred.
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